On 21 April 2021, the European Commission adopted the Corporate Sustainability Reporting Directive (CSRD). The aim of this new directive is to encourage investors to make sustainable investments and thus achieve sustainable and inclusive growth. That is why, starting from the 2025 financial year, large companies will have to report on sustainability on a mandatory basis. All listed companies (with more than 500 employees) will have to report on this as early as the 2024 financial year.
Why is the CSRD being introduced?
A trend is occurring on the international level: companies are being required to pay more and more attention to ESG (Environmental, Social, Governance). Through its so-called Green Deal, the European Union has expressed the ambition to become climate neutral by 2050 and at the same time promote future-proof economic growth that provides stability, employment and sustainable investments.
Despite the multitude of initiatives in this area, by international organisations and other parties, a uniform system of rules for sustainability reporting has been lacking until now. The criticism from investors and other stakeholders is that as a result "reported information is often not sufficiently reliable or comparable between companies". This makes it difficult for companies that want to distinguish themselves in the area of sustainability to demonstrate this distinctiveness.
The European Commission has pledged in the European Green Deal and in its work programme for 2026 to propose a review of non-financial reporting. The CSRD is part of this.
Another objective of the CSRD is to achieve greater alignment with the broader legislative framework on sustainable finance. This includes two things:
- the European Sustainable Finance Disclosures Regulation (SFDR); and
- the Taxonomy Regulation
What is the impact of this new directive?
On 21 June 2022, EU policy-makers agreed on the final texts of the CSRD. These texts reflect the state of play approved by the Committee of Permanent Representatives of the EU Member States. This preliminary agreement still has to be approved by the Council and the European Parliament. The following is a list of the things that are currently known:
Expanding the number of companies required to produce sustainability reports
| Current situation |
CSRD expansion |
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Currently, large public interest organisations (so-called PIE institutions) and listed companies in the European Union are required to include non-financial information in their management report. |
As a result of the CSRD, all small and medium-sized listed companies as well as large companies must also apply the new binding EU standards for sustainability reporting. |
Large companies are companies exceeding the limits of at least two of the three following criteria on the balance sheet date:
- Balance sheet total: €20 million;
- Net turnover: €40 million;
- Average number of employees during the financial year: 250 FTE.
For large listed PIEs (with more than 500 employees) the obligation applies from the 2024 financial year, for large companies from 2025. For small and medium-sized listed companies, the obligation is intended to only apply from the 2026 financial year.
The content of the required sustainability information to be reported is being expanded
The CSRD requires, among other things, the drafting and adoption of European Sustainability Reporting Standards (ESRS). The European Financial Reporting Advisory Group (EFRAG) was asked to provide technical advice in the form of fully drafted standards for the ESRS. The first draft version of the ESRS was published at the end of April 2022. The standards correspond to the first set of standards in the CSRD proposal and cover the full range of ESG issues as well as some general standards. In total, the proposal contains 139 elements to be reported on. These draft standards are now available for consultation and will be finalised by Q2 2023.
Mandatory assurance for sustainability reporting
Pursuant to the CSRD, there is an monitoring obligation for sustainability information. In order to guarantee the reliability of sustainability reporting, a limited degree of certainty (assessment) must be obtained for the sustainability information in the annual report. This may later turn into an obligation to obtain reasonable assurance (audit) in sustainability reporting.
Sustainability information is part of the management report and subject to ‘digital tagging’ (XBRL)
The intention is to publish sustainability information as a clearly identifiable section in the management report, in order to promote the readability and identification of the sustainability report.
All companies that have to comply with the CSRD are required to file their annual accounts and annual reports in Standard Business Reporting (SBR). SBR is the national standard for the exchange of all business reports, such as annual accounts. CSRD adds a digital taxonomy for sustainability information to SBR for sustainability information. Companies must then 'digitally tag' the information.
Introduction of the dual materiality concept:
The CSRD standards introduce the concept of 'dual materiality', which provides criteria for determining which sustainability information should be included in the company's report. ‘Dual’ refers to both the potential financial impact on the company as a result of sustainability risks and opportunities (from the outside in) and the company's impact on people and planet (from the inside out).
Include explanation of information on the value chain
The standards call for extensive attention to the responsibility of all companies in the value chain. This means that companies must report not only on their own performance on the ESG themes, but also on that of their customers and suppliers. The exact requirements will be worked out by EFRAG on a theme-by-theme basis. There is a realisation, however, that retrieving information from the value chain can be a complex matter. Therefore, during the first three years, an exception can be made for not being able to retrieve (all) the necessary information from the value chain.
How to report in accordance with the CSRD guidelines
Reporting on sustainability information is new for many companies and the information systems are often not yet equipped for it. In addition, more information is expected on the sustainability of business models, ethical conduct and internal control when it comes to sustainability. Good and timely preparation is therefore extremely important so that your company can in fact report in accordance with the CSRD standards as of financial year 2024 or 2025.
Below is an overview of steps and key questions that are essential for reliable and relevant reporting.
More information
The CSRD has far-reaching consequences mainly for large companies that have not yet been required to report on non-financial information, but also for smaller organisations that are part of the value chain of these large companies. Would you like to know more about the directive or reporting, or do you have any other questions? Please do not hesitate to contact us for advice without obligation. Do you want to keep up to date with the developments regarding CSRD? You will always find the latest developments on this page.